AlterNet
Why Every Aspect of Dems' Handling of Wall St. Overhaul Seems
Headed for Disaster
By Nomi Prins, AlterNet
Posted on March 3, 2010, Printed on March 3, 2010
http://www.alternet.org/story/145862/
For Senate Banking Committee Chairman Christopher Dodd, D-Conn.,
retirement probably can't come soon enough. After the latest round
of compromises, capitulations and castrations of the Senate
financial reform bill, it's looking increasingly clear that Dodd
is simply no longer willing to fight for real reform, assuming he
ever was to begin with.
Dodd's latest effort at creating a new Consumer Financial
Protection Agency would render the regulator utterly powerless,
but it's not the only issue Democrats appear willing to sacrifice
to Wall Street campaign contributions. Right now, just about every
other major element of the so-called Wall Street overhaul seems
headed for disaster.
The drama currently swirling around the creation of a new Consumer
Financial Protection Agency has captured the most public
attention. With passionate support from progressives and
widespread approval among the general public, the establishment of
some kind of new consumer agency has been certain since President
Barack Obama proposed it in June 2009. But the bank lobby and
Republicans are fiercely opposed to creating a new agency that
goes to bat for consumers, not bankers. Since June, we've been
waiting to see whether Democrats had the spine to make sure the
final agency would actually do something, or quietly gut reform
with a barrage of loopholes.
What we need is a prominent, independent agency with its own
budget and the ability to both write and enforce strong rules. In
essence, Congress needs to take every consumer protection power
the Federal Reserve currently wields, and give it to a new agency
that won't ignore abuses in the name of bank profits. Sadly, in a
misguided effort at bipartisan hand-holding, Dodd appears to have
abandoned this vision.
Dodd actually offered two separate proposals in the past few days.
Last week he suggested housing the new consumer agency—dubbed the
Bureau of Financial Protection in Dodd's language—within the
Treasury Department, where it would have to consult with other
bank regulators before issuing rules. Treasury? The place that
shoved trillions of dollars into Wall Street's rapacious mouth
after it nearly over-leveraged itself into oblivion? We already
know where Treasury stands in conflicts between bank balance
sheets and the public.
But on Monday, Dodd managed to make his proposal even more
ludicrous. Instead of Treasury, Dodd now wants to house the new
consumer regulator at the Fed. That's right, the same Fed that
refused to regulate subprime mortgages, credit card abuses,
reckless commercial real estate speculation and just about every
kind of arcane, non-transparent and speculative banking activity,
that has wreaked havoc on the American economy over the past
decade. We'd almost be better off with some rotating committee
that pays rent to convene at the various different banks'
headquarters.
If we're going to go the route of finding a home inside a home, at
least go for the Department of Justice so fraud indictments can be
made easier. But Dodd obviously is no longer interested in
justice, at least where Wall Street is concerned. He'd even bar
the new consumer agency from enforcing the rules it writes,
allowing the same regulators who dropped the ball for 30 years to
keep dropping it. The strongest rule in the world doesn't mean a
thing if nobody will enforce it.
If Dodd moves ahead with a CFPA that can't enforce rules, he's
given up on consumer-oriented reforms at the committee level,
without even forcing Republicans to vote for a real bill on the
Senate floor. There is simply no excuse for that. But the bungling
of Wall Street reform goes far beyond CFPA. After the most
expensive bailout in history, protecting our economy from reckless
banking—consumer-related or otherwise—shouldn't be a partisan
issue. Anybody who doesn't want to see trillions of taxpayer
dollars dumped into the banking system again should be on board.
The massive bailout supported a system that created $14 trillion
in securities on the back of just $1.4 trillion worth of actual
subprime loans. Banks borrowed by an average of 10 to 1 on the
back of those $14 trillion of securities, brewing a toxic cocktail
of credit derivatives in the process. The consumer fixes are
important, but they only address those original $1.4 trillion in
loans. What if Wall Street had binged on commodities or corporate
bonds or the future of Greece instead of houses? Let's take a
moment to review the issues that should be core reforms:
Who gets to have the most power over regulating the biggest banks?
At the moment, that remains the Fed. Dodd's bill would ostensibly
create a council of supervisors to sit around pontificating about
growing risks to the overall financial system, but the council is
comprised of the same regulators that not only missed the housing
bubble, they are blissfully unaware of the current risk posed by
2009's batch of federally subsidized record bank profits. The Fed
would maintain its existing authority to police our banking
behemoths, despite its total failure to regulate prior to this
economic crisis.
Since the Fed retains the authority to bless mergers (think J.P.
Morgan Chase-Bear Stearns-Washington Mutual, Bank of
America-Merrill Lynch and Wells Fargo-Wachovia), and the Fed gets
to create non-transparent loan facilities to help the big banks
whenever it feels like it, the Fed would remain fully empowered to
let banks take bigger risks and saddle taxpayers with the bill if
they don't pan out.
The Fed should stick to setting interest rates. Regulating the
biggest banks should be under the domain of the FDIC, which has a
strong record of protecting depositors and taxpayers at smaller
banks. The FDIC manages the fund that backs deposits, so it gets
in serious trouble if a big bank fails and wipes out that fund. It
has stronger institutional incentives to rein in wild banks.
Needless to say, we also need a strong, independent CPFA, to make
sure consumers are dealt with fairly, but more importantly expand
upon those protections to curtail the very lucrative business of
securitizing those consumer products from which banks extract
mega-fees before the related toxicity becomes our bill.
Will the biggest banks engage in the riskiest trading and
speculative securities gambling?
They already are. The record profits (and bonuses) made by the
banking system in 2009 were made possible by two things: 1) the
cheap funding provided by the federal government; and 2) trading
division revenue. Banks lost money in their consumer-oriented
businesses due to rising defaults, delinquencies and foreclosures
(which in many cases haven't even been properly accounted for) and
they certainly didn't attempt to use their federal money for
lending purposes, even to proven, prudent borrowers. Why bother?
The trading profits they disclosed came not from their proprietary
books (which would only be partially dealt with under the Volcker
rule Obama has proposed), but in their "client-related" trading
books. That trading increased systemic risk.
Meanwhile, inane accounting rules enacted in 2008 make it very
easy for banks to assign almost any value of their own choosing to
their least liquid (read: most toxic) trades, instead of requiring
banks to account for these "assets" at the price the market would
actually pay for them. This means that trading profits are the
kinds of profits most likely to be improperly manipulated.
Any good reform bill should restrict the percentage of all trading
revenue, not just proprietary trading revenue, within any bank
that receives any kind of federal funding.
Will the derivatives and multi-layered securitization markets
remain largely intact?
Despite ongoing debates about which derivatives will have to trade
on regulated exchanges and which won't, so far, Congress has kept
the most offensive securities in the realm of the unregulated.
There isn't anything in the bill that strictly limits the amount
of fabricated debt that can be packaged into a security with solid
collateral. Part of Wall Street's big derivatives con was to slice
and dice actual mortgages on an actual home into complex
securities. But then clever investment bankers realized they could
slice and dice the securities themselves, not just mortgages, into
second-order securities called "collateralized debt obligations"
(CDOs). Many took the scam even further, slicing and dicing CDOs
into "CDOs squared" to the point where traders weren't betting on
housing anymore, but pure speculative confidence.
Dodd does nothing to limit this fantasy finance. Today, there is a
growing market for "distressed assets" – re-packagings of all the
toxic crap bankers lost money on in the fall of 2008 into complex
"new" securities. Without real reform, these assets could blow up
anew at any time.
Will banks be Glass-Steagallized, or remain unnecessarily big and
complex?
A number of senators have spoken out in favor of a solid barrier
between banks that deal with the public through taking deposits
and making loans, and banks that package and trade securities.
These include Senators Bernie Sanders, D-Vt., Maria Cantwell,
D-Wash., John McCain, R-Ariz. and most recently adding his voice,
Senator Ted Kaufman, D-Delaware.
Congress created Glass-Steagall to protect the entire general
economy from banking recklessness in 1933, and Congress killed
Glass-Steagall in 1999. Now it's time for Congress to resurrect
it. This is not a matter of Depression-era nostalgia (I wasn't
around at the time and I'm sure many of you weren't either). It's
a matter of simple economic prudence and practicality.
Since the repeal, banks have consolidated, becoming bigger and
inherently more systemically dangerous. Bank that had deposits and
loans could use them to back more speculative businesses, while
enjoying access to the Fed for cheap money if they found
themselves in a bind, and the FDIC to back their more solid base
of deposits.
Post-repeal, banks found themselves competing to borrow as much
money as possible to back the riskiest and most speculative
aspects of finance, since those activities scored the most profit
in the short-term. The result of these bank wars was a massively
risky system that collapsed in late 2008. After the rescue, the
big banks are bigger, extracting more money from trading with
access to deposits and the Fed, and able to raise money more
cheaply based on the presumption of further government bailouts.
Even the planned "resolution mechanism" to help unwind failing
banking behemoths can't undo those unfair (and unsafe) competitive
advantages.
This is unacceptable and economically moronic. Dissecting the
landscape and dividing boring banks from wild securities firms
will do more to protect the public's money and do more to rein in
Wall Street stupidity, greed and entitlement than any other reform
measure.
Dodd is leaving the Senate after this year. He could get behind
real reform and secure a meaningful place in the history books as
an important statesman, or continue to wimp out for Wall Street,
pull a Robert Rubin and secure a cushy job in banking come 2011.
The next few months will indicate whether Dodd cares more about
his legacy than his wallet.
Nomi Prins is a senior fellow at the public policy center Demos
and author of It Takes a Pillage: Behind the Bailouts, Bonuses,
and Backroom Deals from Washington to Wall Street.
© 2010 Independent Media Institute. All rights reserved.
View this story online at: http://www.alternet.org/story/145862/
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